Contracts for building and construction projects can be as varied as buildings — they come in many shapes and sizes. Some are as short as one-page proposals, while others may include dozens, and even hundreds, of sections and pages. Whether you’re a building owner or general contractor, there are a number of key provisions that should be considered in most all contracts. Based on experience working on construction contracts for more than 30 years, we’ve outlined a list of the 10 most important.
#1: Scope of the Work
The items on this list of the top 10 provisions are not in order of importance — except for the first. How the parties describe the scope of the work to be performed is the most important part of a construction contract. The scope of work defines what a contractor is obligated to provide, in exchange for the money an owner is obligated to pay. The scope of the work details the materials, labor, equipment, services, etc. that will be required — which means that matters not included in the written scope will either not be provided, or will only be provided if the owner agrees to pay more.
Scope of work provisions that do not accurately reflect the expectations and intent of both owner and contractor may lead to change orders that otherwise would not have been necessary, cost overruns, and disputes. The scope of the work can be defined through plans, specifications, and other documents that are included with, or identified in, the contract. Pay very close attention to the documents identified, making sure that they are accurate and complete. Often, the contract also includes clarifications and exclusions of particular items that are not part of the agreed work, or will be provided by the owner or through other contractors to the owner.
The price of a construction project must match up with the agreed scope of the work. If the scope of work increases, so will the price.
There are several industry standards for price options in construction contracts:
- fixed price, also referred to as a stipulated or lump sum;
- cost of the work plus a fee for the contractor, sometimes with a fixed maximum amount, and other times without a maximum; and
- unit pricing.
Payment terms identify the particulars of when payments are due, what is required in order for payments to be made, and the consequences of non-payment. There are typically periodic payments made during the course of construction, with final payment(s) upon substantial or final completion. Retainage and release of retainage may be addressed.
#4: Time in Construction Contracts
Your construction contract should account for the following time considerations:
- When will the work begin? Specified date, or perhaps after a stated event, such as upon issuance of permits necessary for construction.
- When should the work be completed — either as a date or a particular duration? How is completion verified? Sometimes through determination by a third party, such as an architect, or through issuance of a certificate of occupancy by a building inspections office.
- Under what circumstances will the time for performance be extended? Weather delays, plan revisions, and circumstances beyond the contractor’s control, are a few examples.
- Are there to be any monetary consequences if construction is not timely completed? If so, consider terms for liquidated damages, which are an amount agreed to in advance for delayed completion. These are usually specified as a daily amount, and must be a reasonable estimate of the actual costs of delay.
#5: Handling Changes to Contracts
Changes after construction has begun are common — and almost inevitable. There are many reasons for changes, often referred to as change orders, from the scope of work being increased or reduced because of desires of the owner or due to matters discovered during construction.
The contract should provide a procedure describing how changes will be handled so as to be binding on both the owner and the builder. The best practice is for change orders to be in writing, and include details on the effect of the change order on the scope of the work, the price for the work, and the time for completion.
#6: Concealed or Unexpected Conditions
Before a construction contract begins, it’s difficult to account for concealed or unexpected conditions, such as unexpected rock or unsuitable soil encountered in an excavation, or when unknown conditions are found behind existing walls in a renovation project.
A concealed or unexpected conditions clause is a form of a changes clause. It provides an opportunity for a price increase, but is fair, because the scope of work and price were set upon conditions expected by the contractor prior to commencement of work. Concealed and unknown conditions clauses may set specifics on what conditions qualify, and procedures to be followed once the conditions are discovered.
Construction contracts typically include requirements for the types and amounts of insurance each party is required to maintain during, and sometimes after completion, of a project. Provisions also include details on proving the existence of insurance and who are named as the insured parties. The parties should make sure that insurance on the construction work itself is in place before commencement and remains in place until the owner’s permanent property insurance picks up coverage for the completed project. This type of insurance is known as “builder’s risk,” although it may be obtained by builders or owners. It insures against losses during construction that result from fire, windstorm, theft, and other specified risks. It does not insure against defective construction. It’s always best to have insurance advisors for the owner and the builder review the insurance terms.
#8: Construction Warranty
Construction warranties are either “express” or “implied.” Express warranties are typically made by the builder and the manufacturer of materials included in the work, such as shingles, HVAC equipment, etc. Implied warranties are provided by law. In North Carolina, the law implies a warranty of workmanship, meaning that it is the duty of a contractor to perform work in a proper and workmanlike manner. There is also an implied warranty of habitability made by one that is both the seller and builder of a residence. In some circumstances, implied warranties may be disclaimed.
Builders often offer a one-year repair or replacement warranty; however, the law does not imply or require a one-year warranty. Express warranties from builders and manufacturers should be carefully considered for their coverage terms, duration, inclusions and exclusions.
#9: Termination of a Construction Contract
Owners and builders often include provisions for cancelling a contract, in order to allow for more options and certainty to terminate a contract than is otherwise applied by general contract law. Termination clauses are typically for “cause” and/or for “convenience.” An owner may retain the right to terminate a construction project for convenience (i.e., without cause). Termination clauses also address how final payment to the contractor is to be determined, which can vary, based upon the reason for the termination.
#10: Dispute Resolution
While parties do not enter into contracts thinking that a dispute may arise, the possibility always exists. In the absence of an agreement, the default forum for resolving disputes will be litigation in court. Another option is for parties to submit disputes to binding arbitration. Provisions requiring parties to explore resolution through mediation or other settlement opportunities prior to proceeding to court or to arbitration are often included in construction contracts.
These 10 provisions are not a comprehensive list of matters to be included in a construction contract. Consideration should be given by the parties and experienced counsel to contract terms that are appropriate for the particular circumstances of each project.
About the Author:
- Anderson Carmen is a director and attorney at the Winston-Salem law firm of Bell, Davis & Pitt, P.A. His areas of practice include representation of owners, contractors, and design professionals in construction law matters. He is also a mediator, arbitrator, and member of the North Carolina Civil Collaborative Law Association.